ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward Looking Statements
Certain statements contained in, or incorporated by reference in, this report are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “should,” “will,” and similar words or expressions. The Company's forward-looking statements include certain information relating to general business strategy, growth strategies, financial results, liquidity, the Company's ability to continue as a going concern, discontinued operations, research and development, product development, the introduction of new products, the potential markets and uses for the Company's products, the Company's ability to increase its sales campaign effectively, the Company's regulatory filings with the FDA, acquisitions, dispositions, the
development of joint venture opportunities, intellectual property and patent protection and infringement, the loss of revenue due to the expiration on termination of certain agreements, the effect of competition on the structure of the markets in which the Company competes, increased legal, accounting and Sarbanes-Oxley compliance costs, defending the Company in litigation matters and the Company's cost saving initiatives. The reader must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by assumptions that fail to materialize as anticipated. Consequently, no forward-looking statement can be guaranteed, and actual results may vary materially. It is not possible to foresee or identify all factors affecting the Company's forward-looking statements, and the reader therefore should not consider the list of such factors contained in its periodic report on Form 10-K for the year ended
June 30, 2017
and this Form 10-Q quarterly report to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.
Executive Overview—Nine-Months Ended
March 31,
2018
and
2017
.
The following highlights are discussed in further detail within this Form 10-Q. The reader is encouraged to read this
Form 10-Q in its entirety to gain a more complete understanding of factors impacting Company performance and financial
condition.
• Consolidated revenue increased approximately $
308,000
, or
3.7%
, to $
8,648,134
during the
nine-month
period ended
March 31,
2018
as compared to same period of the last fiscal year. The increase in net revenue is attributed to an increase of $98,000 in surgical products, and an increase of $211,000 in digital imaging cameras and AXIS image management system software offset by a decrease of $1,000 in ultrasound products.
• Consolidated cost of goods sold totaled approximately $
4,793,000
, or
55.4%
, of consolidated revenue for the
nine-month
period ended
March 31,
2018
, as compared to $
4,506,000
, or
54.0%
, of consolidated revenue for the same period of the prior fiscal year. The increase of
1.4%
in cost of goods sold as a percentage of consolidated revenue is due mainly to a a decrease in ultrasound products margin due to product mix and decrease in the margin from surgical products.
• Total operating expenses decreased approximately $
605,000
, or
14.0%
, during the
nine-month
period ended
March 31,
2018
as compared to the same period of prior fiscal year. This decrease was due to decreased marketing, general and administrative expenses of $
122,000
, or
3.5%
and a decrease of $
483,000
, or
55.1%
, in research and development expenses.
• Net income was approximately $
532,000
for the
nine-month
period ended
March 31,
2018
, which includes other income of $500,000 from source code software licensing agreement.
Company Overview
The following discussion should be read in conjunction with interim condensed consolidated financial statements and
the notes thereto, which are set forth in Item 1 of this report.
The Company operates in the healthcare market specializing in the development, manufacture, marketing and distribution of medical devices and pharmaceuticals in the area of ophthalmology. The Company and its products are subject to regulation and inspection by the FDA. The FDA requires extensive testing of new products prior to sale and has jurisdiction over the safety, efficacy and manufacture of products, as well as product labeling and marketing. The Company's Internet address is
www.escalonmed.com
. under the trade name of Sonomed-Escalon the Company develops, manufactures and markets ultrasound systems used for diagnosis or biometric applications in ophthalmology, develops, manufactures and distributes ophthalmic surgical products under the Trek Medical Products name, and manufactures and markets digital camera systems for ophthalmic fundus photography and image management systems.
Critical Accounting Policies
The preparation of unaudited condensed consolidated financial statements requires management to make estimates and assumptions that impact amounts reported therein. The most significant of those involve the application of FASB-issued authoritative guidance concerning Revenue Recognition, and Intangible Assets, discussed further in the notes to consolidated financial statements included in the Form 10-K for the year ended June 30, 2017. The unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, and, as such, include amounts based on informed estimates and judgments of management. For example, estimates are used in determining valuation allowances for deferred income taxes, uncollectible receivables, obsolete inventory, sales returns and rebates, warranty liabilities and valuation of purchased intangible assets. Actual results achieved in the future could differ from current estimates.
The Company used what it believes are reasonable assumptions and, where applicable, established valuation techniques in making its estimates.
Accounts Receivable
Accounts receivable are recorded at net realizable value. The Company performs ongoing credit evaluations of customers’ financial condition and does not require collateral for accounts receivable arising in the normal course of business. The Company maintains allowances for potential credit losses based on the Company’s historical trends, specific customer issues and current economic trends. Accounts are written off against the allowance when they are determined to be uncollectible based on management’s assessment of individual accounts. The Company recorded an allowance for doubtful accounts of approximately $173,000 and $172,000 as of March 31, 2018 and June 30, 2017, respectively.
Inventories
Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or net realizable value. Provision is made for slow-moving, obsolete or unusable inventory.
Accrued Warranties
The Company provides a limited one year warranty against manufacturer’s defects on its products sold to customers. The Company’s standard warranties require the Company to repair or replace, at the Company’s discretion, defective parts during such warranty period. The Company accrues for its product warranty liabilities based on estimates of costs to be incurred during the warranty period, based on historical repair information for warranty costs.
Valuation of Intangible Assets
The Company annually, and as circumstances require, evaluates for impairment its intangible assets in accordance with FASB guidance related to other intangible assets, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. These intangible assets include trademarks and trade names and licenses. Recoverability of these assets is measured by comparison of their carrying amounts to future discounted cash flows the assets are expected to generate. If identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value. The Company does not amortize intangible assets with indefinite useful lives, rather, such assets are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs its intangible asset impairment tests on or about June 30, of each year. Any such impairment charge could be significant and could have a material adverse impact on the Company's financial statements if and when an impairment charge is recorded.
Revenue Recognition
Product revenue includes the sale of medical device products and the sale and installation of the Company's AXIS image management system software. Revenue is recognized for medical device products at the time of shipment and for software when the software is delivered and installed.
The Company provides products to its distributors at agreed wholesale prices and to the balance of its customers at set retail prices. Distributors can receive discounts for accepting high volume shipments. The discounts are reflected immediately in the net invoice price, which is the basis for revenue recognition. No further material discounts or sales incentives are given.
The Company’s considerations for recognizing revenue are based on the following:
- Persuasive evidence of an arrangement exists
- Delivery has occurred
-The Company's price or fee is fixed or determinable
-Collectability is reasonably assured
License and services plan revenues are recognized proportionally over the service period, which for both licenses and service plans are typically one year. Deferred revenue related to licenses and services plans was approximately $463,000 and $388,000 as of
March 31, 2018
and June 30, 2017, respectively and included in accrued expenses in the accompanying unaudited condensed consolidated balance sheets.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. As of
March 31, 2018
and June 30, 2017, the Company has a fully recorded valuation allowance against its deferred tax assets.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying unaudited condensed consolidated statements of operations. As of March 31, 2018 and June 30, 2017, no accrued interest or penalties were required to be included on the related tax liability line in the unaudited condensed consolidated balance sheets.
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” ("US Tax Reform"). The US Tax Reform provides for significant changes in the U.S. Internal Revenue Code of 1986, as amended. Certain provisions of the US Tax Reform will be effective during the Company’s fiscal year ending June 30, 2018 with all provisions of the US Tax Reform effective as of the beginning of the Company’s fiscal year ending June 30, 2019. As the US Tax Reform was enacted after the Company’s year end of June 30, 2017, it had no impact on the Company’s fiscal 2017 financial results. The US Tax Reform contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017.
Beginning on January 1, 2018, the US Tax Reform lowers the US corporate income tax rate to 21% from that date and beyond. The Company estimates that the revaluation of its US deferred tax assets and liabilities to the 21% corporate tax rate will have no net effect on its deferred tax assets and liabilities as the Company has a full valuation allowance as of
March 31, 2018
.
Although the Company believes it has accounted for the parts of the US Tax Reform that will have the most significant impact on its financials, the ultimate impact of the US Tax Reform on the Company’s reported results in 2018 may differ from the estimates provided herein, due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued, and other actions the Company may take as a result of the US Tax Reform different from that presently contemplated.
Fair Value Measurements
FASB issued authoritative guidance for fair value measurements that define fair value and establishes a hierarchy for reporting the reliability of input measurements used to assess fair value for all assets and liabilities. The FASB-issued authoritative guidance defines fair value as the selling price that would be received for an asset, or paid to transfer a liability, in the principal or most advantageous market on the measurement date. The hierarchy prioritizes fair value measurements based on the types of inputs used in the valuation technique. The inputs are categorized into the following levels:
Level 1—Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2—Directly or indirectly observable inputs for quoted and other than quoted prices for identical or similar assets and liabilities in active or non-active markets.
Level 3—Unobservable inputs not corroborated by market data, therefore requiring the entity to use the best available information available in the circumstances, including the entity’s own data.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and related party note payable approximate their fair value because of their short-term maturity. The carrying amount of the accrued post retirement benefits approximates fair value since the Company utilizes approximate current market interest rates to calculate the liability. The Company determined that the carrying amount of the note payable approximates fair value since such debt borrowing bears interest at the approximate current market rate.While the Company believes the carrying value of the assets and liabilities are reasonable, considerable judgment is used to develop estimates of fair value; thus the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange.
Earnings (loss) Per Share
Earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. All outstanding stock options are considered potential common stock. All outstanding convertible preferred stock are considered common stock at the beginning of the year or at the time of issurance, if later, pursuant to the if-converted method. The dilutive effect, if any, of stock options is calculated using the treasury stock method. As of
March 31, 2018
, the average market prices for the three and nine months periods then ended are less than the exercise price of all the outstanding stock options and, therefore, the inclusion of the the stock options would be anti-dilutive. In addition, since the effect of common stock equivalents is anti-dilutive with respect to losses, the stock options and convertible preferred stock have been excluded from the Company’s computation of loss per common for the three months ended March 31, 2018 and 2017, and the nine-months ended March 31, 2017. Therefore, basic and diluted loss per common share for the three-month period ended
March 31, 2018
and 2017 and nine-month period ended March 31, 2017 were the same. For the nine-month period ended March 31, 2018, the if converted method was used for the convertible preferred stock to calculate the dilutive earnings per share.
Results of Operations
Three-month and nine-month periods Ended
March 31, 2018
and
2017
The following table shows consolidated net revenue, as well as identifying trends in revenues for the three-month and nine-month periods ended
March 31, 2018
and
2017
.
Table amounts are in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month period ended March 31,
|
|
For the nine-month period ended March 31,
|
|
2018
|
|
2017
|
|
% Change
|
|
2018
|
|
2017
|
|
% Change
|
Net Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
2,413
|
|
|
$
|
2,661
|
|
|
(9.3
|
)%
|
|
$
|
8,014
|
|
|
$
|
7,795
|
|
|
2.8
|
%
|
Licenses and service plans
|
$
|
223
|
|
|
$
|
185
|
|
|
20.5
|
%
|
|
$
|
634
|
|
|
$
|
545
|
|
|
16.3
|
%
|
Total
|
$
|
2,635
|
|
|
$
|
2,846
|
|
|
(7.4
|
)%
|
|
$
|
8,648
|
|
|
$
|
8,340
|
|
|
3.7
|
%
|
Consolidated net revenue decreased approximately $211,000, or 7.4%, to $2,635,000 during the three months ended
March 31, 2018
as compared to same period of the last fiscal year. The decrease in net revenue is attributed to a decrease of $30,000 in surgical products, a decrease of $253,000 in ultrasound products and offset by an increase of $72,000 in digital imaging cameras and AXIS image management system software.
Consolidated net revenue increased approximately $
308,000
, or
3.7%
, to
8,648,000
during the nine months ended
March 31, 2018
as compared to same period of the last fiscal year. The increase in net revenue is attributed to an increase of $98,000 in surgical products, and an increase of $211,000 in digital imaging cameras and AXIS image management system software offset by a decrease of $1,000 in ultrasound products.
The following table presents consolidated cost of goods sold as a percentage of total revenues for the three-month and nine-month periods ended
March 31, 2018
and
2017
. Table amounts are in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month period ended March 31,
|
|
For the nine-month period ended March 31,
|
|
2018
|
|
%
|
|
2017
|
|
%
|
|
2018
|
|
%
|
|
2017
|
|
%
|
Cost of Goods Sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,488
|
|
|
56.4
|
%
|
|
$
|
1,543
|
|
|
54.2
|
%
|
|
$
|
4,793
|
|
|
55.4
|
%
|
|
$
|
4,506
|
|
|
54.0
|
%
|
Total
|
$
|
1,488
|
|
|
56.4
|
%
|
|
$
|
1,543
|
|
|
54.2
|
%
|
|
$
|
4,793
|
|
|
55.4
|
%
|
|
$
|
4,506
|
|
|
54.0
|
%
|
Consolidated cost of goods sold totaled approximately $1,488,000, or 56.4%, of total revenue for the three months ended
March 31, 2018
, as compared to $
4,506,000
, or
54.0%
, of total revenue for the same period of the prior fiscal year. The increase of 2.2% in cost of goods sold as a percentage of total revenue is due mainly to a decrease in ultrasound products margin due to product mix and a decrease in the margin from surgical products.
Consolidated cost of goods sold totaled approximately $
4,793,000
, or
55.4%
, of total revenue for the nine months ended
March 31, 2018
, as compared to $
4,506,000
, or
54.0%
, of total revenue for the same period of the prior fiscal year. The increase of
1.4%
in cost of goods sold as a percentage of total revenue is due mainly to a a decrease in ultrasound products margin due to product mix.
The following table presents consolidated marketing, general and administrative expenses as well as identifying trends in marketing, general and administrative expenses for the three-month and nine-month periods ended
March 31, 2018
and
2017
. Table amounts are in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month period ended March 31,
|
|
For the nine-month period ended March 31,
|
|
2018
|
|
2017
|
|
% Change
|
|
2018
|
|
2017
|
|
% Change
|
Marketing, General and Administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,147
|
|
|
$
|
1,097
|
|
|
4.6
|
%
|
|
$
|
3,337
|
|
|
$
|
3,459
|
|
|
(3.5
|
)%
|
Total
|
$
|
1,147
|
|
|
$
|
1,097
|
|
|
4.6
|
%
|
|
$
|
3,337
|
|
|
$
|
3,459
|
|
|
(3.5
|
)%
|
Consolidated marketing, general and administrative expenses increased 50,000 or 4.6%, to $1,147,000 during the three months ended
March 31, 2018
, as compared to the same period of the prior fiscal year. The change is a result of an increase in compensation for the sales team and an increased legal expense related to converting a related party note payable to series A convertible preferred stock in the current period.
Consolidated marketing, general and administrative expenses decreased $
122,000
, or
3.5%
, to $
3,337,000
during the nine months ended
March 31, 2018
, as compared to the same period of the prior fiscal year. The decrease is mainly due to decreased hiring expense and fringe benefits, reduced office rent expense when the lease was renewed, offset by an increase in compensation for sales team in the current period.
The following table presents consolidated research and development expenses for the three-month and nine-month periods ended
March 31, 2018
and
2017
. Table amounts are in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month period ended March 31,
|
|
For the nine-month period ended March 31,
|
|
2018
|
|
2017
|
|
% Change
|
|
2018
|
|
2017
|
|
% Change
|
Research and Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93
|
|
|
$
|
280
|
|
|
(66.9
|
)%
|
|
$
|
393
|
|
|
$
|
876
|
|
|
(55.1
|
)%
|
Total
|
$
|
93
|
|
|
$
|
280
|
|
|
(66.9
|
)%
|
|
$
|
393
|
|
|
$
|
876
|
|
|
(55.1
|
)%
|
Consolidated research and development expenses decreased $187,000, or 66.9%, to $93,000 during the three months ended
March 31, 2018
, as compared to the same period of the prior fiscal year. Research and development expenses were primarily expenses associated with the planned introduction of new or enhanced products. The decrease is mainly related to the decrease in headcount and consulting expense. The Company reduced research and development expense as part of its cost cutting efforts after the completion of prior projects.
Consolidated research and development expenses decreased $
483,000
, or
55.1%
, to $
393,000
during the nine months ended
March 31, 2018
, as compared to the same period of the prior fiscal year. Research and development expenses were primarily expenses associated with the planned introduction of new or enhanced products. The decrease is mainly related to the decrease in headcount and consulting expense. The Company reduced research and development expense as part of its cost cutting efforts after the completion of prior projects.
Discontinued Operations
During fiscal year 2015 the Company was informed by French Counsel that the total amount claimed by the BHH landlord in the liquidation of BHH was approximately $86,000. The Company did not have insight into the French liquidation process due to the Liquidator's reticence to communicate with the Company. As such, the Company had accrued the present value of the maximum amount potentially due under the lease guaranteed by the Company on behalf of BHH. The landlord's claim under liquidation of
approximately $86,000 can not be revisited by the landlord and can only be potentially increased by interest or sundry expenses. Beginning in fiscal year end 2016 any changes to this liability are included in continuing operations. As of
March 31,
2018 and June 30, 2017, the liability was approximately $96,000 and $91,000, respectively.
Other Income (expense)
On October 2, 2017 Escalon and Modernizing Medicine Inc. (“MMI”) entered into a Source Code Software Licensing Agreement . The Agreement provided MMI a non-exclusive perpetual License to the source code of Escalon’s proprietary image management software (“AXIS source code”) for a one-time payment of
$500,000
. MMI continues to be an authorized reseller of the AXIS product
.
The Company did not have significant other income during the nine-month period ended March 31, 2017.
Interest expense increased as a result of the line of credit having a higher average balance for the nine month period ending March 31, 2018 as compared to the same period ending March 31, 2017, along with an increase in the amount owed for the related party note payable for the nine months ended March 31, 2018 versus March 31, 2017.
Liquidity and Capital Resources
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses and negative cash flows from operating activities and these conditions raise substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed consolidated financial statements do not include any adjustments relating to the realization of the carrying value of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company's continuance as a going concern is dependent on its future profitability and on the on-going support of its shareholders, affiliates and creditors. In order to mitigate the going concern issues, the Company is actively pursuing business partnerships, managing its continuing operations, implementing cost-cutting measures and seeking to sell certain assets. The Company may not be successful in any of these efforts.
If the Company is unable to achieve the mitigating factors mentioned above in the near term, it is likely that its existing cash and cash flow from operations will
not be
sufficient to fund activities without curtailing certain business activities.
The following table presents overall liquidity and capital resources as of
March 31, 2018
and
June 30, 2017
. Table amounts are in thousands:
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
June 30, 2017
|
Current Ratio:
|
|
|
|
Current assets
|
$
|
4,632
|
|
|
$
|
4,155
|
|
Less: Current liabilities
|
2,315
|
|
|
3,001
|
|
Working capital
|
$
|
2,317
|
|
|
$
|
1,154
|
|
Current ratio
|
2.00 to 1
|
|
|
1.38 to 1
|
|
Debt to Total Capital Ratio:
|
|
|
|
Related party note payable and line of credit
|
$
|
165
|
|
|
$
|
795
|
|
Note payable
|
22
|
|
|
—
|
|
Total debt
|
187
|
|
|
795
|
|
Total equity
|
2,360
|
|
|
1,184
|
|
Total capital
|
$
|
2,547
|
|
|
$
|
1,979
|
|
Total debt to total capital
|
7.3
|
%
|
|
40.2
|
%
|
Working Capital Position
Working capital increased $
1,163,000
as of
March 31, 2018
, and the current ratio changed from 1.38 to 1 to 2.00 to 1 when compared to
June 30, 2017
.
Debt to Total Capital Ratio was
7.3%
and
40.2%
as of
March 31, 2018
and
June 30, 2017
, respectively. The increase in the working capital ratio and decrease in the debt to total capital ratio is due to the Debt Exchange Agreement (the "Exchange Agreement") with Richard J. DePiano Sr. ("Mr. DePiano") and DP Associates Inc. Profit-Sharing Plan of which Mr. DePiano is the sole owner and sole trustee (the "Holders") on February 14, 2018. Pursuant to the terms of the Exchange Agreement, the Holders exchange a total of $645,000 principal amount of debt in exchange for 2,000,000 shares of Series A Convertible Preferred Stock.
Cash Used In or Provided By Operating Activities
During the nine-month period ended
March 31, 2018
and
2017
, the Company experienced cash provided by operating activities of
$84,000
and cash outflows from operating activities of $632,000, respectively. The net cash provide by (used in) operating activities for the nine-month period ended
March 31, 2018
, as compared to the same period in the prior fiscal year is due primarily to the following factors:
For the nine-month period ended
March 31, 2018
, the Company had a net income of
$532,000
, which includes other income of $
500,000
, experienced net cash in-flows from a decrease in other current assets of $
8,000
, a decrease in accounts receivable of $
173,000
, an increase in non-cash expenditures on depreciation and amortization of approximately
$35,000
and a change in liabilities of discontinued operations of
$5,000
.The cash inflows were partially offset by cash outflows from a decrease in post-retirement benefits of $
31,000
, an increase in inventory of $
73,000
and a decrease in accounts payable and accrued expense of $
64,000
.
For the nine-month period ended March 31, 2017, the Company had a net loss of $567,000, experienced net cash out-flows from a decrease in post-retirement benefits of $28,000, a change in liabilities of discontinued operations of $3,000, a decrease in accounts payable and accrued expense of $480,000. The cash outflows were partially offset by a decrease in accounts receivable of $159,000, a decrease in inventory of $181,000 and in other current assets of $71,000, and an increase in non-cash expenditures on depreciation and amortization of approximately $34,000.
Cash Flows Used In Investing and Financing Activities
Cash flows from investing activities of $500,000 were the proceeds from the source code licensing agreement during the nine-month period ended March 31, 2018. There was no cash flows used in or provided by investing activities during the nine-month periods ended March 31, 2017.
Cash flows provided by financing captivities during the nine-month periods ended
March 31, 2018
includes proceeds from related party note payable of $100,000 reduced by repayment of the line of credit of $85,000. Cash flows provided by financing captivities during the nine-month periods ended March 31, 2017 includes proceeds from related party note payable of $270,000 and $250,000 of line of credit.
Debt History
On December 29, 2016, the Company entered into a credit agreement providing the Company up to an aggregate of $250,000 in cash, secured by the Company’s inventory. The Company, and its wholly owned subsidiary Sonomed,Inc., entered into an Inventory Advance Agreement as of December 29, 2016 (the "Agreement"), with CDS Business Services, Inc., doing business as Newtek Business Credit ("Newtek"). Newtek may in its discretion make loans against the Company’s Eligible Inventory in an aggregate amount outstanding at any time up to the lesser of (i) fifty percent (
50%
) of the Inventory Value or (ii) the Inventory Advance Limit, as those terms are defined in the Agreement, which is currently $250,000. The credit agreement renews annually and can be terminated upon 90 days written notice from the Company or 30 days written notice from NewTek.
If, at any time and for any reason, the aggregate amount of the outstanding advances under the Agreement exceeds the Inventory Advance Limit or percentage limitation contained in the preceding sentence, then Company must, upon demand by Newtek, immediately pay to Newtek, in cash, the amount of such excess, or at Newtek’s option Newtek may charge such excess against any reserves held by Newtek.
Newtek will maintain reserves against Company’s availability for advances and may maintain reserves against the Company’s accounts and/or ineligible inventory as well, or maintain a cash collateral deposit account, as Newtek in its discretion deems appropriate. Newtek may also increase such reserves or reduce its advance percentages based on eligible inventory without declaring an event of default and without prior notice, if it determines, in its discretion, that such increase in reserves or reduction is necessary, including, without limitation, to protect its interest in the collateral and/or against diminution in the value of any collateral, and/or to insure the prospect of payment or performance by Company of its obligations to Newtek are not impaired.
Interest will accrue on the daily balance at the per annum rate of 5.00% above the Prime Rate (currently 4.25%), but not less than 5.0%. The current annual interest rate is 9.25% as of
March 31,
2018. The Company’s obligations will, at the option of Newtek, (i) from and after the occurrence of an event of default, or (ii) if the Company’s obligations are not paid in full by the termination date, bear interest at the per annum rate of 10.00% above the prime rate. All interest payable by under
the financing documents will be computed on the basis of a 360-day year for the actual number of days elapsed on the daily balance.
In consideration of monitoring, ledgering and other administrative functions undertaken by Newtek in connection with the Company’s inventory, and the merchant processor, Company is obligated pay Newtek a monthly collateral monitoring fee calculated by multiplying (i) seventy basis points (0.7%) (approximately an annual rate of 8.5%) (except during the existence of an Event of Default at which time it shall be
1.0%
) by (ii) the amount of the average daily balances during the calendar month preceding the month for which the calculation is made.
The foregoing description of the Agreement does not purport to be complete and is qualified in its entirety by reference to the Agreement, a copy of which is attached to the Form 8-K report dated December 29, 2016.
As of
March 31,
2018 and June 30, 2017, the line of credit balance is at
$165,000
and
$250,000
, respectively. The line of credit interest expense is
$16,339
and
$12,884
for the three-month period ended
March 31, 2018
and 2017, respectively.
The line of credit interest expense is
$36,849
and $12,884 for the nine-month period ended
March 31, 2018
and 2017, respectively.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company was not a party to any off-balance sheet arrangements during the nine-month periods ended
March 31, 2018
and
2017
.
The following table presents the Company's contractual obligations as of
March 31, 2018
(excluding interest):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
3-5
|
|
More than
|
|
|
Total
|
|
1 Year
|
|
2-3 Years
|
|
Years
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease agreements
|
|
$
|
1,496,838
|
|
|
$
|
320,093
|
|
|
$
|
484,428
|
|
|
$
|
547,788
|
|
|
$
|
144,529
|
|
Total
|
|
$
|
1,496,838
|
|
|
$
|
320,093
|
|
|
$
|
484,428
|
|
|
$
|
547,788
|
|
|
$
|
144,529
|
|